Callaway 2006 Annual Report Download - page 99

CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During 2006, 2005, and 2004, tax benefits related to stock option exercises were $839,000, $2,408,000 and
$2,161,000, respectively. Such benefits were recorded as a reduction of income taxes payable and an increase in
additional paid-in capital.
Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the
related asset or liability. Significant components of the Company’s deferred tax assets and liabilities as of
December 31, 2006 and 2005 are as follows (in thousands):
December 31,
2006 2005
Deferred tax assets:
Reserves and allowances ........................................ $17,574 $17,944
Compensation and benefits ...................................... 6,963 6,854
Effect of inventory overhead adjustment ........................... 5,221 3,291
Compensatory stock options and rights ............................ 5,480 2,880
Revenue recognition ........................................... 2,032 1,441
Long-lived asset impairment ..................................... 631 635
Operating loss carryforward ..................................... 1,357 2,221
Tax credit carryforwards ........................................ 3,605 3,649
Energy derivative ............................................. 8,177 8,230
Other ....................................................... 745 1,115
Total deferred tax assets ............................................ 51,785 48,260
Valuation allowance for deferred tax assets ............................. (4,083) (4,980)
Deferred tax assets, net of valuation allowance .......................... 47,702 43,280
Deferred tax liabilities:
State taxes, net of federal income tax benefit ........................ (3,162) (2,837)
Prepaid expenses .............................................. (2,373) (2,209)
Depreciation and amortization ................................... (6,789) (1,269)
Net deferred tax assets .............................................. $35,378 $36,965
Of the total tax credit carryforwards of $3,605,000 at December 31, 2006, the Company has state investment
tax credits of $1,663,000 which expire at various dates through 2012 and $619,000 that generally do not expire,
foreign tax credit carryforwards of $44,000 which expire at various dates through 2019, and research and
development credit carryforwards of $59,000 which expire at various dates through 2021 and $1,220,000 that
generally do not expire. The utilization of the net operating loss carryforwards is limited and the carryforwards
expire at various dates through 2015 if unutilized.
The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are not,
in management’s estimation, more likely than not to be realized. This allowance primarily relates to the
uncertainty of realizing certain tax credit carryforwards, and a portion of other deferred tax assets. Of the
$4,083,000 valuation allowance at December 31, 2006, $1,054,000 is related to certain Top-Flite deferred tax
assets existing at the time of the acquisition. In the future, if the Company determines that the realization of these
Top-Flite deferred tax assets is more likely than not, the reversal of the related valuation allowance will reduce
goodwill instead of the provision for income taxes. Based on management’s assessment, it is more likely than not
that the net deferred tax assets will be realized through future earnings.
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